Why are Tanah Merah condos back in vogue among property investors?

Over the past decade, the Tanah Merah area has been somewhat subdued. It’s long been known that the area caters well to tenants who work in the airport; but beyond that it’s not garnered much interest.

As of 2023 however, we have seen renewed interest in the area, with mounting inquiries over the past few weeks. Here’s what investors have managed to pick out regarding the area:

Tanah Merah’s underrated potential in the property market

Despite its proximity to the airport, Tanah Merah hasn’t received the attention it deserves. This can be attributed to two factors:

First, there’s a misreading of transaction histories, regarding some of the condos in this area.

An example of this would be Urban Vista. Even back when Grandeur Park Residences was launched in 2020, realtors had to contend with buyers bringing up Urban Vista, which has recorded just 38 profitable transactions (but 76 unprofitable transactions!) in its history.

However, close inspection will reveal this had very little to do with Tanah Merah as a location. Urban Vista’s underperformance is almost entirely due to its launch near the last property peak (2012/13).

The next few years saw a slew of cooling measures that brought prices down, resulting in many sellers who had bought high and sold low. When viewed without this context, it can create an erroneous impression of the area.

Looking to Square Foot Research as our source, we can see that 2013 was a period of peak prices in the district. Following this, multiple rounds of cooling measures kept prices low, until signs of a recovery that began showing in 2017.

The second factor is the lack of immediate amenities in the area. Any residents that want to eat, shop, or play will need to take the MRT elsewhere. There’s also admittedly a lack of schools in walking distance. This is still true for now; but it’s the upcoming change to this situation, which has drawn investor interest again (see below).

The third factor, which impacts resale more than rental, is the general unit mix of many Tanah Merah condos. Apart from the more recent Grandeur Park Residences, a check reveals that many of the area’s condos have a disproportionate number of one and two-bedders. It’s alright for tenants, but a tough buy for HDB upgraders who tend to be families, and want something at least on par with their previous four or five-room flat.

(This may be due to many Tanah Merah area condos being older, and therefore built in a time when investing in shoebox units was still a trend).

Setting aside the current lack of amenities, Tanah Merah meets key requirements as a rental area

The development of Changi Business Park, as well as Changi Airport and buildings like the Changi Jewel, are all easily accessible from Tanah Merah.

The Tanah Merah MRT station connects directly to Changi Airport in two stops, providing fast access to places like Changi Jewel. Alternatively, Tanah Merah also connects to Tampines MRT in one – and for those unfamiliar with the area, Tampines is the regional hub of the East.

Tampines has a cluster of three major malls, Grade A office spaces, and is specifically built as part of Singapore’s decentralisation attempts (i.e., it’s built to remove the need for east-side residents to travel to the CBD).

Also one stop away is the mature town of Bedok, which recently has seen its own upgrades. In a short while, Bedok Point mall will be redeveloped into a mixed-use condo that includes shops and dining, in the form of Sky Eden at Bedok.

By train, Tanah Merah sits at the nexus of these three key areas. By car, condos in the Tanah Merah area are roughly a four-minute drive from Changi Business Park. This is CapitaLand’s intended “CBD of the East”, which is set to almost double its current size upon completion.

SUTD provides an added source of potential tenants, in the form of students who are living off-campus but need easy access to the school.

Also around five minutes’ drive is the Singapore University of Technology and Design (SUTD), which makes Tanah Merah condo a viable form of student lodging. Many of the condos surrounding SUTD at the moment – such as Changi Court and Changi Green – are much older and date back to the ‘90s.

All of this creates a major catchment area for tenants; and one that’s gone under the radar for a long time, due to biases about Tanah Merah being a “dull” area.

But while the 2020 launch of Grandeur Park Residences brought some awareness back to Tanah Merah, it’s launches like Sceneca Residence that should make investors take note (as well as current owners of other Tanah Merah condos, as it’s broadly beneficial to them).

The major upcoming change around Tanah Merah MRT

Sceneca Residence is at 28 Tanah Merah Kechil Link (468458), just across from the Tanah Merah MRT station (East-West Line) on New Upper Changi Road.

The ground floor of Sceneca Residence will constitute a 2,000 sqm. retail component, and the developer has said half the floor space will go toward a supermarket. This is likely to be a Sparco outlet, similar to what we saw at The Poiz (another MCC Land Development). So besides having a 24/7 connection to the MRT station, residents here will have best access to amenities in the immediate area.

Of all the residential developments in the area, Sceneca Residence is the closest to the MRT and is directly integrated with it.

The unit mix at Sceneca Residence also includes larger layouts:

Three-bedders make up the bulk of units, and range from 904 to 1,055 sq. ft. For multi-generational or larger families, there are premium three-bedders like the deluxe, which go up to 1,367 sq. ft.

Beyond this, there are 23 four-bedder luxury units that are 1,518 sq. ft., and four penthouse units that range between 2,400 to 2,756 sq. ft.

For new investors, there are still some one-bedders, range between 463 to 570 sq. ft. The two-bedders range from 678 to 797 sq. ft., but there are 2+1 options that go all the way up to 883 sq. ft.

These two elements – surrounding amenities and larger units – are precisely what Tanah Merah needs to meet its full investment potential. As such, Sceneca Residence isn’t just interesting to its own prospective buyers: it’s also a boon to nearby condos like Optima @ Tanah Merah, Urban Vista, etc.

(The residents of these condos will also benefit from having Sceneca Residence in walking distance).

What are the potential yields like?

Let’s use a new one-bedder unit at Sceneca Residence, as a point of estimation. We’ll project a cost of about $2,200 psf, as this is a typical price point for a new launch, OCR condo as of 2023.

Average rental rates in District 16 are $2,700 to $3,500 per month, for the typical one-bedder unit.

Assume we purchase a one-bedder unit at $2,200 psf. With a 25 per cent down payment, Buyers Stamp Duty (BSD), and conveyancing costs, this comes to an initial outlay of $282,994, with a total investment equity (loan) of $1,018,600.

We will also assume an interest rate of 3.5 per cent, as the current home loan rate is about three per cent.

These are the projected returns:

Here’s what happens when we apply the same principles to a three-bedder.

In this case, we will use a slightly lower $2,100 psf projection (price psf tends to decrease the unit gets larger), with an initial outlay of $538,136, and a loan of $1,898,400. We assume the same 3.5 per cent loan rate:

If you’re holding for a shorter period like three years, there isn’t much visible difference between the one-bedder and three-bedder. The only difference is the higher cash outlay for the three-bedder, which is balanced out by saleability factors (a one-bedder is generally harder to sell than three-bedders, as family buyers cannot fit into the one-bedder).

As such, we can see that Sceneca Residence makes for a strong rental prospect; and why its appearance has rekindled interest in the Tanah Merah area.

The Tanah Merah area is likely to see continued interest, as the pandemic effect winds down

As the pandemic eases, landlords in Singapore have seen record rises in rental rates; but location is still the most crucial factor.

Rental rates in Singapore have been peaking since as far back as December 2021. This is likely to continue as foreign workers return to Singapore. The Tanah Merah area is well-positioned to take advantage of this, due to its access to the airport.

Consider that, for airline workers or those with offices at Changi Business Park, living in the CBD would be pricier and more impractical than staying at Tanah Merah. And as for other nearby integrated developments – such as Sky Eden at Bedok – we’d need to consider that Tanah Merah has an equally strong commercial component, and is a stop closer to the airport.

Given the higher prices and stamp duties in 2023, it’s high time investors looked outside of the traditional CBD for rental assets; and Tanah Merah may be a good place to start.

For those who want to scout out viable properties on the east side to compare, you can contact me directly at Max Properties as I specialise in the area. As part of our real estate consulting, we can help to determine whether a Tanah Merah condo – or another east end property – better fits your portfolio.